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UPDATE 2-Rate cuts worked, oil drag over -Bank of Canada
June 28, 2017 / 6:29 PM / 4 months ago

UPDATE 2-Rate cuts worked, oil drag over -Bank of Canada

(Recasts with Poloz comments)

By Nia Williams

CALGARY, Alberta, June 28 (Reuters) - Interest rate cuts in 2015 have done their job, two top Bank of Canada policymakers said on Wednesday in separate appearances that ramped up market expectations for a rate hike in July.

Governor Stephen Poloz and Deputy Governor Lynn Patterson both said the worst is now behind Canada after the central bank’s rate cuts two years ago helped the economy weather weak oil prices, suggesting it is now time to end the ultra-low interest rate environment.

“It does look as though those cuts have done their job. But we’re just approaching a new interest rate decision so I don’t want to prejudge,” Poloz said in a European interview published by CNBC on Wednesday.

“But certainly we need to be at least considering that whole situation now that the ... excess capacity is being used up steadily.”

The bank will make an interest rate announcement July 12.

Policymakers have shifted to a dramatically more hawkish tone in recent weeks, startling many analysts who had not expected a hike until 2018. Chances of a rate increase in July rose to 43 percent on Wednesday from 30 percent the day before , while the loonie surged to a four-month high after the Poloz comments.

In a speech to financial analysts in Calgary, Patterson said intelligence gathered in conversations and surveys was playing an invaluable role in the bank’s decision-making, adding that tools like the Business Outlook Survey, to be released Friday, gave the bank timely information that it cannot get elsewhere.

“I can’t emphasize enough how critical these real-time perspectives are to our overall understanding of economic developments, particularly during periods of heightened uncertainty,” she said.

A strong Business Outlook Survey could be one reason for the bank’s shift to a more hawkish stance, even as inflation data released last week showed the annual inflation rate was just 1.3 percent, well below the bank’s 2 percent inflation target.

While some analysts said the weak inflation data would stay the bank’s hand in July, Patterson noted there were interesting divergences in inflation measures beyond the headline number.

“Certainly recently we’ve seen some inflation below our two percent target,” she said in response to a question after the speech. “It’s interesting, even in the last data we got last week, you are seeing quite a differentiation between services inflation and goods inflation.”

CIBC Economist Nick Exarhos said service sector inflation is running closer to 2 percent to 2.5 percent. (Reporting by Andrea Hopkins and Leah Schnurr; Editing by Andrew Hay and Diane Craft)

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